In order for your small business to process credit cards, most merchant account providers will have you go through a fairly detailed merchant account underwriting and application process. This will help to determine the type of risk factors your small business may pose to the merchant service provider and sponsoring bank. Learn what it takes to submit the cleanest file possible to increase your chances of a fast approval!
Gathering this information for the sponsoring bank is part of the merchant account underwriting process. Each merchant service provider must follow strict underwriting guidelines for each new merchant account. A merchant account underwriter will look at how long you have been in business, your financial history, and your previous processing history if applicable. You will need to furnish information about your products and/or services as well as how you generally conduct business. The more detailed information provided, the better the understanding the merchant service provider and the sponsoring bank will have about your business and business practices.
The merchant application process is extremely important. You should always do your best to find a seasoned professional who understands your specific business needs and business model. In doing so, you will be less likely to run into unforeseen challenges that could result in risk analysis flagging your account down the road. Please call your SecureGlobalPay rep as they are experts with the application process.
What is Merchant Account Underwriting?
The term “underwriting” is typically used in references to banks insurance companies or any institution looking to mitigate their risk exposure. It simply means that an establishment will receive some type of payment in exchange for any potential risk they decide to cover. In regards to merchant accounts, you are technically receiving a line of credit so it is important that your merchant account provider evaluate your business credibility and creditworthiness to get the best merchant account rates possible.
How Does a Merchant Service Provider Evaluate Risk?
Evaluating risk depends on the sponsoring banks, and merchant account underwriting requirements. The sponsoring bank and merchant provider work together to issue you a merchant account number and process your transactions. Below is a list of items that most sponsoring banks or financial institutions consider when underwriting your business for a merchant account.
Industry – There are so many different categories of industry and each industry is evaluated by a merchant account underwriter for perceived risk. While it’s still very possible to be approved for a merchant account in a high-risk industry, you may be asked to jump through a few extra hoops or pay higher transaction fees. However, it is important to know that you can be rejected during the application process specifically based on the industry that your business falls under regardless of other factors on the application.
The following examples can help give you an idea of which risk category your business may fall under.
Low-Risk Merchant Accounts – These businesses are typically restaurants and retail businesses.
Medium Risk Merchant Accounts – websites or retail stores that sell health and beauty products, telecommunication and utility services, lawyer offices, and political organizations.
Higher Risk Merchant Accounts– gyms, insurance agencies, handmade apparel and jewelry, charities, businesses who have monthly memberships or subscription-based services, web development, forex, adult, tech support, or gaming development businesses
There are many businesses that are extremely difficult to underwrite including many online auction websites, online pharmacies, online gun stores, businesses involved in tourism, businesses that sell health and nutrition supplements, or businesses that sell products with broad health claims. If you fall under one of these industries, give SecureGlobalPay a call today as they have many relationships that specialize in these business types only.
Longevity – The longevity of a business can really make a difference in merchant account underwriting. The best scenario is a business that has been in business for five years or more. They typically have an established customer base with a steady flow of cash. This is important to a merchant account provider as it means that the business can effectively respond to the unexpected, including returns, chargeback fees, etc. Longevity may also mean that the business is considered a lower risk.
Chargeback history – Chargebacks can occur when a customer is unhappy with your product and requests a refund. Another common chargeback situation happens when your customer says that they never received your product. They can simply call up their credit card company and demand the charge from your company be removed.
If you have previously had a merchant account, then the chargeback history will most definitely be taken into account. High chargeback rates are considered a huge risk as almost everybody loses money on the transaction. It is to your advantage to make sure that you take every possible opportunity to make your customers completely happy with their purchase.
Billing Procedures – Many merchant account underwriters will analyze your billing procedures to assess the cash flow risk. If your business bills in advance before products and/or services are produced, then a merchant account underwriter will consider you a higher risk. This is due to situations changing and services or products not being used or needed by the customer. If this happens frequently, then your chargeback rates are going to be much higher and as discussed previously, a high chargeback history puts you in a higher risk category.
Business Owner Credit Score – As with most purchases for loans, a bad credit score will have an impact on your merchant account application process. If you do have poor credit, then you may want to consider submitting financial statements instead of your credit score. If your business has multiple partners with great credit scores, then we recommend that they fill out an application for a merchant account.
Transaction Volumes – Transaction volumes are one of the most important factors when it comes to merchant account underwriting. It isn’t uncommon for brand new businesses to have a smaller volume processing cap until their business model is proven successful. That cap will be increased when you have proven business stability.
What Information Will I Need for My Merchant Account Application?
Copy of your driver’s license
Copy of voided check with the following business information:
Most recent credit card processing statements
What Information May I Need for My Merchant Account Application?
Most recent tax returns
Most recent financial statements
Most recent bank statements
Information about How Your Business is Set Up (DBA, Partnership, Corporation)
Special Situations for Approval
There are so many unique situations that an underwriter must consider when working through a merchant account application. Sometimes these unique situations can still be approved for a merchant account if a few adjustments are made in how the money is processed.
Upfront reserves – you may receive approval for a merchant account if you agree to a situation known as an upfront reserve. The merchant account payment processor will hold onto a designated amount upfront to mitigate some of the risks until the merchant can prove reliability. This tends to happen only on very high-risk accounts.
Holds, Holdbacks, Rolling Reserves – the processor will require a certain amount of funds to be withheld per transaction until the merchant can prove reliability. This tends to happen only on very high-risk accounts.
Daily processing fee – typically a processor charges their fees monthly. However, a special situation may require the processor to take fees out of the merchant account daily.
If your merchant account application is denied, that doesn’t mean you are without options. Your first call should be to a SecureGlobalPay customer service representative. We have the experience you need to navigate the application process. We will work to find a customized solution for you.